The business plan: Break even analysis

Frame and Wheel must continue on with the complex posts. The exercise below is a break even analysis for the company in the first year and is more or less consistent with the income statement in the previous post. These are the following assumptions: the company uses earnings generated from the sale of framesets to finance itself (boot strapping); the company sells only two built up and eight framesets; it also assumes that the company will send two frames for testing (EN and USCP); and, no rent and no employees.

Break even analysis	Volume	Value	Total
Start up costs
USPTO registration	1	1,550	1,550
Formation costs	1	600	600
Filing fee	1	190	190
Frame testing - EN	1	1,500	1,500
Frame testing - USCP	1	450	450
Shipping for testing	2	50	100
Fixed costs
Salary	1	0	0
Rent	1	0	0
Fees	1	200	200
Insurance	1	1,750	1,750
Accounting - book keeping	12	25	300
Others	1	300	300
Total fixed costs			6,940
Variable
Framesets	10	700	7,000
SRAM Red	1	1,200	1,200
DA 7900	1	1,400	1,400
Zipp 404	2	1,600	3,200
3T Rotundo	2	200	400
3T Team	2	70	140
Aliante	2	125	250
Vittoria (pair)	2	80	160
Total			13,750
Framesets selling proce			2,000
Built up bike selling price			5,000
Weighted average selling price			2,600
Variable cost per unit			1,375
Contribution margin per unit			1,225
Break even sales volume			6

The conclusion is that the company will have to sell six frames in order to break even. This is no easy task, but is less daunting then the prospect of having sixteen or sixty frames to sell. Indeed, if the testing information from More Choice is convincing enough, then perhaps Frame and Wheel will be able to forgo additional testing. This will lower the break even level to about four frames. 

If Frame and Wheel has an employee who earns a gross amount of $30,000 per year, break even jumps to 30 frames; this implies a need for space and thus rent (although Frame and Wheel has been clearing out the attic), which implies an even higher break even level. A higher break even point implies outside financing, either debt or equity, because a down payment of 50% or so is required by the factory for larger orders. Frame and Wheel can see the push model raising its head again.